FCA expectations on financial resilience

The UK Financial Conduct Authority released a statement for solo-regulated firms at the end of March to clarify its expectations and display its flexibility for such tough times.

Firms prudentially-regulated by the FCA play an important role in supporting the functioning of the economy. During this time of stress, it expects firms to meet this responsibility by planning ahead and ensuring the sound management of their financial resources. This means taking appropriate steps to conserve capital, and to plan for how to meet potential demands on liquidity.

Capital and liquidity buffers are there to be used in times of stress. Firms that have been set buffers can use them to support the continuation of the firm’s activities. If a firm is planning to draw down a buffer, it should contact the FCA or its named FCA supervisor.

If the firm needs to exit the market, planning should consider how this can be done in an orderly way while taking steps to reduce the harm to consumers and the markets. Firms should maintain an up-to-date wind-down plan that takes consideration of the current market impact of the coronavirus (Covid-19) crisis.

Government schemes to help firms through this period can be part of a firm’s plans for how they will meet debts as they fall due.

If a firm is concerned it will not be able to meet its capital requirements, its debts as they fall due, or if its wind-down plan has identified material execution risks, it should contact the FCA or its named FCA supervisor, with its plan for the immediate period ahead.

When considering whether to make a discretionary distribution of capital to fund a share buy-back, fund a dividend, upstream cash or meet a variable remuneration decision, FCA expects firms and their boards to satisfy themselves that each distribution is prudent given market circumstances, and consistent with their risk appetite. FCA would not expect firms to distribute capital that could credibly be required to absorb losses over the coming period. FCA may contact specific firms in relation to this.

Non-bank lenders subject to IFRS9 are reminded that the standard requires that the forward-looking information used in expected credit loss estimates is both reasonable and supportable. It is essential that the standard is implemented in a well-balanced and consistent way that reflects not only the potential impact of the coronavirus crisis, but also the support provided by governments and central banks domestically and internationally to protect the economy.

Firms that are prudentially regulated by the Prudential Regulation Authority (PRA) should consider the PRA’s requirements and discuss their concerns with them. Those firms should also keep us notified of any significant developments.